Specialty Lines Markets
Competition is strong
among--and for--security firms
Marketplace continues to be challenging, but improvement seems imminent
By Dave Willis
Competition remains fierce among security companies, according to Karen Izzo, president of Izzo Insurance Services. "They are fighting to keep their best clients."
Marc Katz, principal of The Mechanic Group, adds, "The economic hit taken by the retail sector has negatively affected some of our physical security clients. Naturally, any business reversals they experience are passed through to all their vendors—including security firms."
"For the first time since I have been in the business—nearly 40 years—I'm seeing security firm revenues drop," notes Bruce Brownyard, president of Brownyard Programs, who adds that, in the past, the security guard industry did well during economic downturns. "Before, when companies would lay off employees and shut down plants, they actually requested more security. This time around, we have seen revenues down anywhere from 10% to 25%. It's been very dramatic."
There is a silver lining, though. "The good news is, with the bad economy, firms have been able to attract higher quality guards," Bruce Brownyard explains. "They may not have all the work they'd like, but they have been able to hire better and more dependable employees, which saves them money in the long run."
At the same time, he adds, firms are being asked more often to provide armed guards. "Part of that is related to potential terror threats, especially in certain geographic locations," Bruce Brownyard explains. "We've also seen an uptick in workplace violence—current or former disgruntled employees going back to their worksites and committing violent acts."
Diversification and growth
Security guard firms also are diversifying. "Many are offering alternative services to create additional revenue sources," says Katz. "For instance, security guard firms with residential clients have assumed new exposures. The trend by these firms to add concierge services is a good example.
"We are also seeing traditional physical security guard firms build out their service set by offering electronic security services, such as access control systems, scanners, CCTV surveillance, burglar/fire alarm systems," he adds. "This activity is creating new exposures we are covering."
Izzo has seen this, too. "They are integrating their physical presence with electronic security via monitored camera operations," she says. "The combination of guards at the client's site in addition to cameras being monitored at an offsite location can represent greater security with a lower cost than for clients solely dependent on physical security."
There are certain limitations to such hybrid services, Izzo notes. "The electronic security generally works well when a client's site is supposed to be closed," she explains. "The cameras can electronically monitor movement and send notice to the monitoring company. When control of ingress and egress is required, physical security appears to remains the best option."
Tory Brownyard, president of W.H. Brownyard Corporation, has encountered other changes. "We are seeing an above average increase in new security businesses being created," he explains. "This could be attributed to the poor economy and people who have been let go from their jobs deciding to start their own businesses."
Katz has seen this, too. "With a slow economy and rising unemployment rates, we are also seeing more applications for 'start-up' or new business security guard companies," he says. "We have been careful to identify new businesses that are adequately capitalized and have been founded on a successful concept. It is gratifying to help these entrepreneurs get their businesses off the ground. With the economy in rough shape, we feel that each one of us in the private sector can help contribute to a recovery."
Growth is taking place in other areas, as well, Tory Brownyard adds. "We are seeing an increase in government outsourcing security to the private security industry," he notes. "As federal and state budgets are being cut and police departments downsized, they are looking to the private sector to make up for this shortage." This requires private security firms to strengthen the quality of their workforce to meet the government requirements, he adds.
This higher quality of guards is desirable for insurers. "It can result in a lower rate for the guard firm," Tory Brownyard says. "We have been insuring the guard industry for over 60 years and from our history, governmental work by guard firms results in very favorable loss experience. By concentrating on government jobs, guard firms can reduce their liability and the cost of their insurance."
While Bruce Brownyard concurs on the benefit of more qualified guards, he's observed a downside as well. "A smarter guard can sometimes lead to an increase in the size of an employee dishonesty loss," he says. "It's an interesting wrinkle, but a brighter guard with a larcenous streak can be a much more sophisticated thief."
Increased use of armed guards comes with a twist as well. "It's safe to say that our company, as well as the rest of the industry, has seen an increase in shooting claims," he says. "Firearms-related claims can result in huge payouts." At the same time, security firms are being sued when their guards aren't armed and plaintiffs claim they should have been. "It's a Catch-22," he observes.
Subrogation is another issue security firms and their insurance partners face. "We continue to see increased exposure from subrogation brought on by insurance companies and the risk transfer requirements forced on guard companies through additional insured, contractual indemnification and waiver of subrogation," notes Katz. "We try to manage or limit our security guard insureds from these increased exposures, to the degree their clients are willing to accept."
Insuring security firms
All of these factors contribute to a challenging insurance marketplace. "Overall," Katz says, "the market is soft, and we feel this will continue, with rates generally on the lower end of the spectrum. That said, we are seeing signs that rates are leveling in a few markets and, in some instances, we are actually seeing mild rate increases."
Bruce Brownyard uses "perfect storm" to describe the current market. "Revenues for guard companies are down, so consequently, premiums are down," he says. "At the same time, we are in the midst of a prolonged soft market, so loss ratios are up, I believe, for all the major participants in the guard business. In a bad economy, more people are apt to sue."
He has seen signs of hardening, as well. "Up until about six months ago, rates continued to fall," he says. "Since then, we've seen some small, incremental rate increases. Five to ten percent is what we have been seeing. It's quite possible that the soft market is slowly coming to an end."
Tory Brownyard concurs. "The market has been relatively stable," he says. "We have not seen new entrants or lost competitors over the past year. While rates continue to be at the lowest levels we have seen in the past 10 years, we have seen a flattening of rates and some increases on businesses that are doing higher profile work and/or have had some adverse loss experience.
"We have also seen an increase in demand for umbrella coverage, as guard firm clients are demanding higher limits from their guard firms," Tory Brownyard adds.
Insurance providers have responded to market forces. "We have expanded coverage under our policy to respond to current coverage and market conditions," says Izzo. Changes include increased commissions, greater use of dividend programs and lower deductibles, she notes.
Advice for agents and brokers
According to Bruce Brownyard, opportunities exist for retail agents and brokers in the security arena. "It's a great time to solicit this business," he explains. "With the talk of rate increases this year, guard firms are telling brokers to go out and seek competitive bids. That's different from what we've seen the last several years, so it's probably a good time for retail agents to think about some kind of marketing campaign directed at the guard industry.
Agents and brokers with an existing book of guard business need to defend it now. "When someone comes in and says they can drop the price by five or ten percent or not increase the price, it's important to understand what's in the policy," he explains. "We encourage our agents and brokers to talk about the quality of our product."
Tory Brownyard tells agents and brokers: "Do your research! With rates as they are, brokers can find a competitive premium for their client no matter where they go, so they should make sure they are getting them the broadest coverage available," he says. "Several admitted insurers are serving the market, so they may not be limited to the surplus lines market."
It's important to understand differences among guard firms, as well as markets. "Agents need to closely monitor their clients and keep up to date on their operations," Tory Brownyard says. "Some of the markets providing coverage to the security guard industry exclude certain client types, so it is important for the broker to be aware of the new clients that their insured picks up to make sure the policy provides coverage for this exposure."
Katz has seen an uptick in submission activity this year, in part because of shopping. "More brokers are targeting this class of business because they believe there are good opportunities," he says. "Plus, agents and brokers are looking for additional revenue in the face of a soft market, so they are looking for ways to offer more products and round out coverage."
He affirms the need for product familiarity. "It's extremely important for brokers to understand the difference in coverage forms between programs," he says. "As insureds are looking for ways to cut costs, brokers are being pressured into finding the lowest priced program. But be careful!
"You may be opening up a can of worms by obliging the insured with a lower priced program, but also giving the insured less coverage than what they previously had," Katz adds. "Ask for specimen policies and read through the endorsements. Titles of endorsements listed on a proposal may not always tell the exact intent of coverage."
Izzo agrees. "Many policies designed for the security industry may appear to be the same," she says. "Closer examination could reveal verbiage the broker isn't comfortable presenting to the client. Ask for specimen endorsements that will be attached to the basic ISO form, and be leery of manuscript forms."
She encourages use of contract clauses when guard firms are expanding into video monitoring. "Clauses such as exculpatory, limitation of liability, liquidated damages and third-party indemnification need to be incorporated," Izzo says. State alarm licenses may also be required for such expansion. "From a coverage standpoint, agents need to talk with clients to assess current coverage and determine how the policy responds to the insured's expanded operations," she adds.
Izzo also recommends agents and brokers work with clients to make sure the security company doesn't indemnify clients for all security-related claims. "It's wise for a security company to use its own, well written contract," she says. "The contract should limit liability to claims resulting from the guard company's negligence and should not name clients as additional insureds."
Possible agent E&O exposures could result from lack of knowledge and diligence. "We see retail brokers open themselves to E&O exposures because they aren't familiar with their own security client's standard contract," Izzo says. Particular problems arise with certificates being issued that don't track policy contract language.
Security industry knowledge and insurance expertise can go a long way to building marketplace success. Agents and brokers can deliver value, bolster client relationships and boost profits by tapping this knowledge and expertise and competing on something other than price. "Brokers can deflate the cost-cutting pressure from insureds by educating them on why the lowest-priced program may not be their best option," Katz says.